MGT Capital Investments, Inc. (OTCQB:MGTI) Q4 2017 Earnings Conference Call April 4, 2017 4:30 PM ET
Rob Lowrey - Chief Financial Officer, Treasurer & Secretary
Rob Ladd - Chief Executive Officer
Steve Schaeffer - President, Crypto-Capital Strategies
Grace Livingston - Vice President of Communications
Good afternoon and welcome to the fourth quarter 2017 MGT Capital Investments, Inc. Investor Call Update. My name is Rob Lowrey; Chief Financial Officer of MGT and I will be hosting the call. Joining me on the call is Robert Ladd, MGT’s President and Chief Executive Officer and Steve Schaeffer, MGT’s President of Crypto-Capital Strategies. The agenda for today’s call is for Mr. Ladd and Mr. Schaeffer to give an overview of the Company and status of its crypto-currency business. I will then follow with financial highlights of the Company’s operating results of the three months and twelve months ended December 31, 2017. Following my presentation, we will address questions we received from our shareholders and then conclude the call.
Prior to starting the call, I would like to state the following forward-looking information. All information set forth in this Investor Update Call, except historical and factual information, represents forward–looking statements. This includes all statements about the Company’s plans, beliefs, estimates and expectations. These statements are based on current estimates and projections, which involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These risks and uncertainties include issues related to rapidly changing technology and evolving standards in the industries in which the Company and its subsidiaries operate and the ability to obtain sufficient funding to continue operations, maintain adequate cash flow and license and sign new agreements and the unpredictable nature of consumer preferences; and other factors set forth in the Company’s most recently filed annual report.
Call participants are cautioned not to place undue reliance on these forward–looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward–looking statements to reflect events or circumstances that arise after the date hereof. Call participants carefully review the risks and uncertainties described in other documents that the Company files from time to time with the U.S. Securities and Exchange Commission, including our Annual Report on Form 10-K, for a complete discussion of forward-looking statements and risk factors faced by our business.
With that said, I will now turn the call over to Mr. Ladd for an overview of the Company.
Thank you, Rob. I would like to begin our list of our accomplishments in the past year with Rob Lowrey, who just introduced me. Rob joined the Company as our Chief Financial Officer about a month ago. He is an experienced executive with a tremendous amount of small cap public company experience, set on a foundation as training; it was a CPA for 10 years plus with Ernst & Young. I think any Company would be proud to attract a seasoned financial executive like Rob, and we welcome him.
We have come a long way over the past year with improvements across the board. With respect to the many legal assaults against MGT, I am very happy to report that the
Securities Class Action case was dismissed with prejudice meaning it cannot be re-filed, and no appeal was subsequently filed. I am also happy to report that the baseless defamation case brought by a prior investor was dismissed.
This same investor filed a meritless breach of contract lawsuit and that had two of three of its claims dismissed, while a third is the subject of a motion to reconsider. The negative impact of being a defendant is profound in terms of legal expenditures, diversion of attention and public image. We cannot expect that our resounding wins will remedy that image immediately, but at the least management distraction will be reduced.
As we reported, balance sheet metrics were the strongest in the Company’s history, with respect to cash levels and lack of debt. We also ended 2017 with a multi-year high of $12 million in equity book value. On the income statement side, we reported $3.1 million in revenues that’s up 10-fold from 2016, while holding our cash expenses flat at approximately $5.5 million, this equated to net cash used by operations of $2.4 million in 2017, a sizable improvement over 2016.
We also refocused and streamlined the Company into a pure-play cryptocurrency mining operation, ending the costs and diversions of the cybersecurity business. As part of this transformation, our relationship with John McAfee ended. We currently have just under 5,000 fully owned Bitmain Antminer S9 bitcoin miners and another 2,000 of those same computers that are owned by outside investors, but are managed by MGT. We also have successfully moved our equipment and mining operations to a newly built out facility in northern Sweden.
I would like to close by stating that the employees, Executive Team, Officers and Directors of MGT, thank shareholders for their support.
I will now turn the mic over to Steve Schaeffer who will report on our mining activities.
Thank you, Rob, and thank you all for listening. I’d like to start out with some operating highlights which have occurred over the last four months. Bitcoin mining revenue was $1.9 million in the fourth quarter and $3.1 million for the year. All revenues were earned in our Washington State facility. In Q1 2018, we began a transition of our mining assets from Washington State to Northern Sweden. We made this transition primarily due to the lack of electrical electric power available in Washington at that time. We successfully located and entered into a contract with a hosting center that we believe fits our needs in as far as physical size, as well as having the abundance of power available to the location. We have agreed with the hosting center to make available up to 25MW to MGT in a single location where we currently have our mining hardware housed. The transition presented many unique challenges, as a result, we missed our stated goal of having all of our hardware operational by end of first quarter of 2018. That shortfall was principally due to two factors.
Number one, weather, weather was a significant factor in these delays. Northern Europe as well as the North Atlantic basin suffered a historically tough winter this year. The weather impeded our ability to get hardware shipped in a timely fashion to the Norbotten province which is in the north of Sweden, Snowstorms were constant, coupled with sub-zero temperatures making it difficult for our hosting partner to execute on their infrastructure build-out timeframes. The weather also made for delays -- for freight forwarders to deliver our hardware and that was shipped to Sweden from the U.S. Many of these shipments simply had to wait for storms to subside to allow safe passage to the north. And lastly, the difficult conditions delayed the local power company in their efforts to dig through frozen and ice-covered grounds to run primary feeders from the ultra-high voltage substation to our building location.
Secondly, we experienced a steep learning curve with the customs clearing in Sweden. We lost about three weeks in January just working through the customs procedures in Sweden to get our [costs hardware] cleared for delivery to our location. I’d like to say that we are confident that we have learned how to best deal with the challenges of weather, and how to best build out our facilities to mitigate weather related downtimes. We also have established relationships with local Swedish logistics firms to better handle our customs clearing and freight forwarding activities. We expect this to improve our deployment efficiency significantly going forward.
Some things we have accomplished to get ahead on our future expansion. I’d like to go through a few things and just let everybody understand how we have taken some measures to try to increase our efficiency going forward on our deployment times, contracting that from what would typically be anywhere from an eight to 12-week period, to perhaps a shorter period. So, we’ve taken some measures to try to institute things and get things done and get ahead of ourselves for our future expansion. Number one, the location has been built out internally to facilitate approximately 22,000 miners in the future. The power to this location has a 40-megawatt potential thereby 22,000 being a perfect fit for the physical size of the building as well as the power availability.
Now, I’d like to discuss some of our current operations and where we stand as far as miners that are in operation. Currently, we have over 3,000 miners in operation with a planned ramp up in the month of April, 2018. The local power company has estimated April 16th as the date to power up three new 4-megawatt transformers at our location. At that time, we estimate we will turn on another 3,800 miners that have been preprogrammed, racked and fully ready to turn on, the moment the power is generated through our [PEUs]. With these transformers activated, power at that location will be in excess of what is required to power up all of our 6,825 bitcoin miners as well as our 50 GPU rigs which we currently own or operate.
Lastly, I’d like to give a few personal comments which kind of my thoughts are, and what I’d like to say about what I feel where we’re at and where we’re going without giving forward guidance that would fall into a Safe Harbor. I feel strongly that our move to Sweden has resulted in a much better current operating situation and has positioned us for much greater future expansion possibilities. I personally know of many miners in Washington that are trying to liquidate inventories currently due to the extended build outs that the PEUs and the local Power Authorities have set forth. Many of these projects were scheduled for a completion in December 2017 and may not execute their engineering build outs until June of 2018 or beyond. Since, we put the power that was supposed to be available to many facilities in the fourth quarter of 2017 and first quarter of 2018 will not happen in those quarters hence if we would have stayed in Washington for that period of time we would not have the current mining capacity we have now and nor would be most likely have the ability to turn on 6,825 units in the next short time frame.
Lastly, I would like to express how excited I am right now as Q2 is looking to be where we put some material rubber to the road with our mining operations. The massive infrastructure we
put in place, will allow for efficient expansion, and I believe Q2 revenues should reflect that progress.
Thank you. And I would like to turn this call over to Mr. Lowrey at this time.
Thanks, Steve. I'm going to talk about the fourth quarter operating results followed by the annual results for 2017. So, revenues for the fourth quarter of 2017 was $1.9 million and that was derived from our Bitcoin mining operations. The cost of revenues was about $750,000 resulting in gross profit of $1.2 million. Operating expenses for the fourth quarter were $6.1 million, resulting in an operating loss of just about $5 million. The Company did experience significant non-cash non-operating expenses totaling $19.1 million during the fourth quarter resulting from our financing activities that were primarily related to our convertible debt and warrant instruments.
Of the $19.1 million of non-cash non-operating expenses $4.6 million related to accretion of debt discount, and $14.5 million related to inducement expense. The inducement expense resulted from issuing incremental shares of common stock, above the stated conversion rate, to induce the holders of the convertible debt to convert debt and warrants to common stock. The Company took this measure to become debt free at the end of the year.
Also, as the net loss to attributable to common shareholders was $23.8 million for the fourth quarter but contributing to this net loss were some significant non-cash expenses, including the $9.1 million that I just spoke of for debt, discount and inducement expense, $600,000 of depreciation and amortization, and $4.7 million of stock compensation expense.
Now for a brief overview of the annual results of 2017 compared to 2016. Revenues for the year was $3.1 million which was derived from our Bitcoin mining operations, compared to $300,000 in 2016. The increase was a result of increased mining capacity through the acquisition and deployment of more mining machines during the year. Cost of revenues were $1.5 million, resulting in gross profit of $1.6 million, compared to gross margin of $100,000 in 2016. Operating expenses in 2017 were $23.2 million, resulting in an operating loss of $21.6 million, compared to an operating loss of $20.2 million in the prior year.
As in the fourth quarter, the Company experienced significant non-cash non-operating expenses and for the year this number was $25.9 million from the financing activities of our convertible debt instruments. Of the $25.9 million, of non-cash, non-operating expense $5.6 related to accretion of debt discount, and $20.3 million related to inducement expense which we just spoke about. So, all in the net loss to common shareholders for the year was $50.4 million compared to $24.8 million of a loss in 2016. However, contributing to net loss were some significant non-cash expenses, which were to $25.9 million of the debt accretion and inducement expense I just spoke about, $1.1 million of depreciation and amortization expense and $16.6 million of stock compensation expense.
From a balance sheet perspective, the Company reported $9.5 million of cash and cash equivalents at the end of 2017 and property equipment of $3.1 million, consisting mostly of our crypto-currency mining machines. And as of year-end, the Company was debt free and had working capital $8.8 million.
I will now turn the call over to Grace Livingston, Vice President of Communications to address shareholder questions that we have received.
A - Grace Livingston
Thank you, Rob. I will ask questions we received from our shareholders. We will not be able to address all questions sent in by our shareholders, however we will try and answer most of them. Mr. Ladd, Mr. Schaeffer and Mr. Lowrey will provide the answers. Starting now, we got our mining operations. Number one, how many S9s do we currently own?
As of March 30, 2018, we own approximately 4,700 mining machines and operate an additional 2,100 miners pursuant to our management agreements.
How many are operations?
As of March 30, 2018, approximately 3,000 machines were operational. We anticipate an additional 3,800 miners to be powered up in the month of April as the local power company activates the three new transformers as scheduled.
What is electric cost in Sweden?
We do not disclose details of our power supply and hosting agreements. We keep these contracts strictly confidential.
What is the capacity of the Sweden location beyond the 22,000-miner capacity of the first building already disclosed?
So, our current existing facility in Sweden has a 40-megawatt capacity which adequately accommodates 22,000 machines. We have well established relationships with many hosting partners in Sweden, in the U.S and internationally and we believe our future power needs can be met to facilitate any growth that we may experience.
What are the one, three, and five-year goals for bitcoin mining capacity?
MGT’s strategy is to continue to expand its crypto-currency mining operations and reduce costs by utilizing more efficient service providers. The Company’s immediate focus is to grow free cash flow with a debt-free balance sheet. Our longer–term objective is focused towards vertical integration of our cryptocurrency mining business as well as diversification into other areas of rapidly emerging Blockchain and cryptocurrency industry.
What is the total contracted capacity for power and how many miners can the power support?
We currently have an agreement in place for 15mW, of the 25mW that may be made available to us under our agreement. But we plan to have access to up to 40mW as previously stated in our current facility and access to more power internationally if needed.
Will there be another location for the next phase of mining expansion?
The Company’s current strategy is to evaluate new locations as they number one, become available, two, meet the Company’s operating needs, and structure and three, provide the means to conduct efficient operations.
Per the 10K there are currently 500 bitcoin mining rigs in Washington as of the end of March, can you give us an estimate of how many working rigs in Q4 average it took to produce the $1.9 million revenue recognized in Q4?
So that fourth quarter with the revenue, is directly related to an average of 843 S9 miners that were averaging operations during the fourth quarter.
Alright, now we are going to go to financials, so we have Mr. Lowrey. How is stock-based compensation calculated?
Sure, stock-based compensation is determined in three different scenarios. One, restricted stock issued to employees and directors; second, restricted stock issued to consultants and third parties and third stock auction expense. The first, category that when stock when restricted stock is issued to employees and directors the fair value of the restricted stock award is equal to the fair value of the company’s underlying stock on the date of grant. That value is then recognized as expense over the vesting period of that stock on the streamline basis.
So, the second category restricted stock issued to consultants and third parties there are two options that company determines the fair value of the stock-based payment either, as the fair value of the configuration or services received from the consultant or service of provider or the fair value of the stock which is issued which everyone is more readily determinable. And then for the third category stock option expense. The company uses the black shows option evaluation model and determines a value on the grant date and expenses that on the straight-line basis over the divesting period.
Could you please provide detail on the inducement expense? What holders were given the lower price inducement?
Well the details on the inducement expense $20.3 million was recognized as a non-cash non-operating inducement expense in 2017. The inducement expense resulted from issuing incremental shares of common stock, above the stated conversion rate, to induce the holders to convert their debt and warrants to common stock. The Company took this measure to become debt free end of 2017. The expense is roughly calculated as the total value of the shares when issued.
Please describe your hedging strategy against bitcoin price fluctuations. What are the types of hedging you are currently using? What is the revenue sensitivity incorporated in hedging? And what are the net costs of that hedging?
It’s a good question, however we do not implement a formal hedging strategy against bitcoin price volatility and fluctuations. However, to minimize the impact of the company’s P&L and price fluctuations, we typically monetize bitcoin shortly after it’s earned.
Alright thank you so much Mr. Lowrey. Now I’ll turn to Mr. Ladd for our final session on business strategy. Mr. Ladd, what current and future, 2018, 2019, 2020 bitcoin and blockchain market expectations drove the pivot to full mining, and what are these expectations based upon?
We believe in the long-term profitability of crypto mining specifically bitcoin, particularly when getting the economies of scale with large capacity.
Once all the bitcoin is mined, what happens to the business model to the company at that point? Will the company remain as profitable? Is there a date to where all the bitcoin will be mined?
It is estimated that the last bitcoin to be mined will occur in the year 2140, based on the original white paper from Satoshi. The total number of bitcoins will never exceed 21 million, and to date, approximately 16.9 million bitcoins have been mined.
And for our final question, can you please give the current share price and bitcoin price, has this changed our plans for an up-list for NASDAQ, given the current prices?
No. Management still plans to apply for up-listing to NASDAQ.
Thank you very much. I’ll now turn it back over to Mr. Lowrey.
Alright, thanks Grace. This concludes the prepared remarks for the fourth quarter 2017 investor update call update. Thank you to all the participants who listened in and thank you to the shareholders that sent in questions. Thank you very much and goodbye.